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Presidents’ Day Market Update

02/21/2012

2012 is getting off to a solid start heading into the Presidents’ Day weekend holiday. I expect the strong foundation being built will soften the eventual corrective blow to the market and keep corrections shallow in nature.
 
•  Year to date:   SPX +8.24%         Nasdaq +13.31%          Dow +5.99%          Russell +11.85%
 
Back in October, the market (Figure 1.1) repriced higher as fear of a double-dip recession in the U.S. proved false. Economic data points in October suggested a positive turn in domestic labor and manufacturing conditions, which has been confirmed in 2012. A second repricing higher occurred in January as the ECB’s LTRO eased liquidity fears over uncomfortably rising government bond yields in Italy, Spain, and other European sovereigns in late 2011 (Figure 1.2).
 
 
Figure 1.1 SPX Two Rounds of Pricing Higher – October 2011 and January 2012


Source: Bloomberg
 
Figure 1.2 Italian 10-Year – July 2011 to Present


Source: Bloomberg
 
Keep in mind, some of the catalysts I expect will be the indicators to assume more risk in 2012 have not unfolded yet. Emerging market central banks have not hit full stride yet in their expected easing cycles nor has the massive reallocation out of Treasuries, both here in the U.S and in Europe (German 10-Year), unfolded yet.
 
U.S. 10-Year Treasury – September 2011 to Present


Source: Bloomberg
 
German 10-Year – September 2011 to Present


Source: Bloomberg
 
The S&P 500® Index remains positioned to challenge its 2011 high of 1370.58. I suggest utilizing a closing basis break below 1333.47 as an indicator that a correction will unfold near term. Until that occurs, there is a high probability for further appreciation of risk assets.
 
SPX -- February 2011 to Present

 

Source: Bloomberg
 
 
Portfolio Strategies
 
•  I expect continued outperformance from corporate bonds, which are enjoying a cyclical “sweet spot” in their investment cycle.
 
•  Exposure to energy remains a top priority but, as suggested in late January, the need to hide out in the sector is no longer present. At the expense of reducing energy exposure, the assumption of more risk in the form of a small cap position is encouraged.
 
•  Consumer discretionary and technology remain sectors of favor.
 
•  “Quality and dividend” payers are still favored over the “need for speed” names that have enjoyed significant appreciation fueled by massive short covering.  See examples below.
 
•  Most importantly, volatility levels have been dramatically reduced, creating blue sky conditions for portfolio construction. Work with your team, focus on risk management. There are plenty of well-defined points of reference levels to lean against in the assumption of more risk.  
 
Favored Thesis – “Quality and Dividend” Examples:

Technology

MSFT (Microsoft)

$262 billion market cap

Year to date +20.38%

Dividend yield +2.6%

Technology

ACN (Accenture)

$41 billion market cap

Year to date +9.77%

Dividend yield +2.3%

Energy

OXY (Occidental)

$84 billion market cap

Year to date +10.22%

Dividend yield +2.1%

Consumer

NKE (Nike)

$49 billion market cap

Year to date +10.70%

Dividend yield +1.4%

Consumer

COH (Coach)

$22 billion market cap

Year to date +22.92%

Dividend yield +1.2%

Consumer 

LTD (Limited Brands)

$14 billion market cap

Year to date +15.24%

Dividend yield +2.2%


Avoid the Temptation -- “Need for Speed” Examples:

SHLD (Sears)

$5.8 billion market cap Year to date+71.59%

Short Interest % of float Dec 31, 2011 38.45%

LEN (Lennar)

$4.2 billion market cap Year to date +18.88%

Short Interest % of float Dec 31, 2011 22.04%

NFLX (Netflix)

 $6.7 billion market cap Year to date +75.86%

 Short Interest % of float Dec 31, 2011 16.95%

FSLR (First Solar)

 $3.6 billion market cap Year to date +26.16%

 Short Interest % of float Dec 31, 2011 31.39%

JCP (JC Penney)

 $9.1 billion market cap Year to date +21.42%

 Short Interest % of float Dec 31, 2011 22.77%

AMD (Advanced Micro)

 $5.1 billion market cap Year to date +37.41%

 Short Interest % of float Dec 31, 2011 15.15%

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.